Federal Reserve Chairman Jerome Powell on Tuesday didn’t quell expectations for a September cut, but rather appeared to be laying the foundations for cut in the coming months after flagging the recent labor market cooling as an increasingly important cog in the Fed’s rate-decision wheel.

“Elevated inflation is not the only risk we face,” Powell said Tuesday in testimony before the Senate Banking Committee, noting that the “labor market has cooled really significantly across so many measures.”

For a long while, curbing high inflation was the key, arguably the only risk for the Fed, and its other main policy focus, maximum employment, didn’t get much attention. And for good reason as jobs remained plentiful.

But with the labor market showing signs of cooling — the Fed has been forced to shift focus and acknowledge the risk is becoming two-sided as keeping policy too high for too long could leave a big dent in employment and the economy.

“Reducing policy restraint too late or too little could unduly weaken economic activity and employment,” Powell said, after noting that labor market indicators “have returned to about where they stood on the eve of the pandemic”

The Fed’s acknowledgement that risks are more two-sided suggests that the central bank’s outlook on the balance of risks is shifting … “in ways that would plausibly underpin a cut in September rate cut,” , Evercore ISI said Tuesday.

While the Fed chief appears to laying the breadcrumbs for a September cut, incoming economic data still holds sway, Evercore ISI adds, ahead of Thursday’s inflation report that could “sustain and support the Fed’s evolving assessment.”

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Others agree and point to the Jackson Hole annual symposium in August as the potential opportunity for the Fed to firm up expectations for a September rate cut.

“If we are right and the data comes in as we project, we suspect that the Jackson Hole symposium in late August will be used as the venue to give the market the clearest indication on impending policy loosening,” ING said in a Tuesday note.

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